IRS Announcement 87-69, I.R.B. 1987-33, 34., (Aug. 17, 1987)

IRS Announcement 87-69

[Code Secs. 3402, 6682 and 7205]

Withholding: Exemption certificates: Penalties.--Guidance is provided to employers and employees with respect to the filing of Forms W-4.

With respect to the $500 penalty mentioned in the instructions to Form W-4, the Service will not apply the penalty to a taxpayer who has tried to figure the number of withholding allowances correctly, even if he or she makes a mistake, and it certainly does not apply when taxpayers receive refunds. The $500 penalty, or even a criminal penalty, applies when taxpayers deliberately and knowingly falsify a Form W-4 or W-4A, Employee's Withholding Allowance Certificate, in an attempt to reduce or eliminate the proper withholding of taxes from their wages. A simple error--an honest mistake--will not result in a penalty. For example, a person who claims six allowances, but should have claimed five or seven, will not be penalized.

Another area of misunderstanding about withholding relates to children who work. An employee who can be claimed as a dependent on someone else's tax return will, in most cases, no longer be exempt from withholding. This includes children who have summer jobs or part-time jobs during the year. It does not matter whether that individual is actually claimed as a dependent, only that he or she can be claimed.

An employee will not be able to claim exemption from withholding if he or she can be claimed as a dependent, has any unearned income, such as interest or dividends, and has wages and unearned income totalling more than $500. This would include children who work and who save some of their earnings, for example.

Even though taxpayers may have already filed their W-4s or W-4As with their employers--three out of four have, according to a Service estimate--now would be a good time to check to see if the amount of tax withheld from their wages is correct. If it is not, IRS says filing a second W-4 or W-4A with the employer is the way to correct that.

For those who have not filed their withholding certificate yet, Oct. 1, 1987 , is the deadline. IRS has instructed employers how to withhold for employees who do not meet that deadline. Employers will make no change for single employees who have claimed one or zero allowances or for married individuals who have claimed zero, one or two allowances, or who have been withheld at the higher single rate. From single employees who claimed more than one allowance, employees will withhold based on one allowance, and married persons with more than two allowances, will only be allowed the two.

Zero allowances and exemption from withholding are not the same. Claiming zero allowances will result in tax withheld from wages, while claiming exemption from withholding will result in no income tax withheld. For example, a single man and a single woman might claim one allowance each, but a married couple who both work might claim zero allowances, or even zero plus an addition amount--the form allows for that--because their combined incomes would result in higher taxes than their separate incomes. On the other hand, someone who is single with wages of $2,540 or less and has no unearned income will generally qualify for exemption from withholding--he or she will owe no income taxes.